BlackRock Enhanced Government Fund, Inc.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-Q

QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED

MANAGEMENT INVESTMENT COMPANY

Investment Company Act file number: 811-21793

Name of Fund: BlackRock Enhanced Government Fund, Inc. (EGF)

Fund Address:  100 Bellevue Parkway, Wilmington, DE 19809

Name and address of agent for service: John M. Perlowski, Chief Executive Officer, BlackRock Enhanced Government Fund, Inc., 55 East 52nd Street, New York, NY 10055

Registrant’s telephone number, including area code: (800) 882-0052, Option 4

Date of fiscal year end: 12/31/2018

Date of reporting period: 09/30/2018

Item 1 – Schedule of Investments

Schedule of Investments  (unaudited) 

September 30, 2018

   

BlackRock Enhanced Government Fund, Inc. (EGF)

(Percentages shown are based on Net Assets)

 

Security   Par
(000)		     Value  

Asset-Backed Securities — 1.9%

 

Securitized Asset Backed Receivables LLC
Trust(a):

    

Series 2005-OP1, Class M2, (1 mo. LIBOR US + 0.68%), 2.89%, 01/25/35

   $ 505     $ 497,104  

Series 2005-OP2, Class M1, (1 mo. LIBOR US + 0.43%), 2.65%, 10/25/35

     1,025       1,012,669  
   

 

 

  

Total Asset-Backed Securities — 1.9%
(Cost — $1,457,097)

 

     1,509,773  
   

 

 

  
Non-Agency Mortgage-Backed Securities — 0.2%  
Collateralized Mortgage Obligations — 0.1%  

Bank of America Mortgage Trust, Series 2003-J, Class 2A1, 3.73%, 11/25/33(b)

     64       64,695  

Bear Stearns ALT-A Trust, Series 2004-13, Class A1, (1 mo. LIBOR US + 0.74%), 2.96%, 11/25/34(a)

     33       33,104  
   

 

 

  
      97,799  
Interest Only Collateralized Mortgage Obligations — 0.1%  

CitiMortgage Alternative Loan Trust, Series 2007-A5, Class 1A7, 6.00%, 05/25/37

     156       34,814  
   

 

 

  

Total Non-Agency Mortgage-Backed Securities — 0.2%
(Cost — $108,750)

 

     132,613  
   

 

 

  
Preferred Securities — 2.5%  
Capital Trust — 2.5%  
Electric Utilities — 2.5%  

PPL Capital Funding, Inc., Series A, 5.00%(c)

     2,000       1,974,580  
   

 

 

  

Total Preferred Securities — 2.5%
(Cost — $1,980,520)

 

     1,974,580  
   

 

 

  

U.S. Government Sponsored Agency Securities — 54.2%

 

Agency Obligations — 4.5%  

Federal Farm Credit Bank, 4.55%, 06/08/20

     3,500       3,599,613  
   

 

 

  
Collateralized Mortgage Obligations — 2.4%  

Freddie Mac Mortgage-Backed Securities,
Series 4480, Class ZX, 4.00%, 11/15/44

     712       697,734  
Security   Par
(000)		     Value  
Collateralized Mortgage Obligations (continued)  

Ginnie Mae Mortgage-Backed Securities,
Series 2006-3, Class C,
5.24%, 04/16/39(b)

   $ 1,185     $ 1,185,511  
   

 

 

  
      1,883,245  
Interest Only Collateralized Mortgage Obligations — 1.1%  

Fannie Mae Mortgage-Backed Securities:

    

Series 2012-96, Class DI, 4.00%, 02/25/27

     825       59,936  

Series 2012-47, Class NI, 4.50%, 04/25/42

     986       227,182  

Ginnie Mae Mortgage-Backed Securities:

    

Series 2006-30, Class IO, 2.30%, 05/16/46(b)

     208       12,063  

Series 2009-78, Class SD, (1 mo. LIBOR +
6.20%), 4.03%, 09/20/32(a)

     1,046       92,996  

Series 2009-116, Class KS, (1 mo. LIBOR +
6.47%), 4.31%, 12/16/39(a)

     293       35,020  

Series 2011-52, Class NS, (1 mo. LIBOR +
6.67%), 4.51%, 04/16/41(a)

     2,979       436,409  
   

 

 

  
      863,606  
Mortgage-Backed Securities — 46.2%  

Fannie Mae Mortgage-Backed Securities:

    

2.50%, 04/01/28

     3,945       3,835,053  

3.00%, 06/01/42 - 04/01/43

     5,545       5,352,860  

3.50%, 08/01/44

     2,860       2,827,483  

4.00%, 10/01/24 - 02/01/41

     7,510       7,650,270  

4.50%, 04/01/39 - 08/01/40

     5,136       5,337,209  

5.00%, 11/01/33 - 02/01/40

     2,631       2,796,737  

5.50%, 10/01/23 - 09/01/36

     2,227       2,402,131  

6.00%, 02/01/36 - 03/01/38

     354       385,894  

Freddie Mac Mortgage-Backed Securities:

    

3.50%, 08/01/33 - 01/01/46

     5,787       5,780,712  

4.50%, 05/01/34

     146       150,809  

Ginnie Mae Mortgage-Backed Securities,
5.00%, 11/15/35

     4       4,466  
   

 

 

  
      36,523,624  
   

 

 

  

Total U.S. Government Sponsored Agency Securities — 54.2%
(Cost — $43,122,306)

 

     42,870,088  
   

 

 

  
U.S. Treasury Obligations — 49.6%  

U.S. Treasury Bonds, 3.00%, 08/15/48

     5,100       4,908,152  

U.S. Treasury Notes:

    

2.63%, 07/31/20(d)

     14,800       14,751,438  
 

 

 

     1  

Schedule of Investments  (unaudited) (continued)

September 30, 2018

   

BlackRock Enhanced Government Fund, Inc. (EGF)

(Percentages shown are based on Net Assets)

 

Security   Par
(000)		      Value  

U.S. Treasury Notes (continued):

     

2.75%, 08/15/21

   $ 6,500      $ 6,475,879  

2.75%, 07/31/23

     3,500        3,468,965  

2.88%, 07/31/25

     9,700        9,617,398  
    

 

 

  

Total U.S. Treasury Obligations — 49.6%
(Cost — $39,709,795)

 

      39,221,832  
    

 

 

  

Total Long-Term Investments — 108.4%
(Cost — $86,378,468)

 

      85,708,886  
    

 

 

  
     Shares          

Short-Term Securities — 1.3%

 

BlackRock Liquidity Funds, T-Fund, Institutional Class, 1.97%(e)(f)

     1,027,675        1,027,675  
    

 

 

  
          

    

Value

  

Total Short-Term Securities — 1.3%
(Cost — $1,027,675)

    $ 1,027,675  
    

 

 

  

Options Purchased — 0.0%
(Cost — $47,153)

      17,043  
    

 

 

  

Total Investments Before Options Written — 109.7%
(Cost — $87,453,296)

      86,753,604  
    

 

 

  

Options Written — (0.3)%
(Premiums Received — $238,238)

      (228,625 ) 
    

 

 

  

Total Investments, Net of Options Written — 109.4%
(Cost — $87,215,058)

      86,524,979  

Liabilities in Excess of Other Assets — (9.4)%

      (7,436,185 ) 
    

 

 

  

Net Assets — 100.0%

    $ 79,088,794  
    

 

 

  
 
(a) 

Variable rate security. Rate shown is the rate in effect as of period end.

(b) 

Variable or floating rate security, which interest rate adjusts periodically based on changes in current interest rates and prepayments on the underlying pool of assets. Rate shown is the rate in effect as of period end.

(c) 

Variable rate security. Security may be issued at a fixed coupon rate, which converts to a variable rate at a specified date. Rate shown is the rate in effect as of period end.

(d) 

All or a portion of the security has been pledged as collateral in connection with outstanding reverse repurchase agreements.

(e) 

Annualized 7-day yield as of period end.

(f) 

During the period ended September 30, 2018, investments in issuers considered to be an affiliate of the Fund for purposes of Section 2(a)(3) of the Investment Company Act of 1940, as amended, were as follows:

 

Affiliate   

Shares
Held at

12/31/17

      Net
Activity		      Shares
Held at
09/30/18		      Value at
09/30/18		      Income     

Net

Realized

Gain (Loss) (a)

      Change in
Unrealized
Appreciation
(Depreciation)		  

BlackRock Liquidity Funds, T-Fund, Institutional Class

      1,981,656        (953,981 )       1,027,675      $ 1,027,675      $ 15,842      $ —      $ —  
           

 

 

     

 

 

     

 

 

     

 

 

  

 

  (a) 

Includes net capital gain distributions, if applicable.

 

Reverse Repurchase Agreements

 

Counterparty    Interest
Rate		     Trade
Date		      Maturity
Date (a)		      Face Value      Face Value
Including
Accrued Interest		      Type of Non-Cash Underlying Collateral    Remaining Contractual
Maturity of the  Agreements (a)

Credit Suisse Securities (USA) LLC

      2.00 %      09/20/18        Open      $ 8,500,000      $ 8,508,995      U.S. Treasury Obligations    Open/Demand
          

 

 

     

 

 

        

 

  (a) 

Certain agreements have no stated maturity and can be terminated by either party at any time.

 

 

 

2   

Schedule of Investments  (unaudited) (continued)

September 30, 2018

   

BlackRock Enhanced Government Fund, Inc. (EGF)

 

Derivative Financial Instruments Outstanding as of Period End

Forward Foreign Currency Exchange Contracts

 

Currency
Purchased		        Currency
Sold		        Counterparty      Settlement Date        Unrealized
Appreciation
(Depreciation)		  
CAD     373,881        AUD     400,000        Deutsche Bank AG        11/19/18        $ 514  
CAD     390,000        CHF     286,696        Natwest Markets PLC        11/19/18          8,859  
CAD     762,033        NZD     890,000        Bank of America N.A.        11/19/18          454  
JPY     34,910,850        CHF     300,000        Bank of America N.A.        11/19/18          1,332  
JPY     31,293,027        CHF     270,000        JPMorgan Chase Bank N.A.        11/19/18          79  
NOK     2,557,373        CHF     300,000        State Street Bank and Trust Co.        11/19/18          7,827  
NOK     4,977,905        EUR     520,000        State Street Bank and Trust Co.        11/19/18          6,783  
SEK     5,416,183        EUR     520,000        State Street Bank and Trust Co.        11/19/18          5,782  
                       

 

 

  
                          31,630  
                       

 

 

  
USD     119,999        CAD     155,000        Barclays Bank PLC        11/05/18          (93 ) 
AUD     400,000        NOK     2,364,088        JPMorgan Chase Bank N.A.        11/19/18          (1,795 ) 
AUD     810,000        NZD     884,123        Bank of America N.A.        11/19/18          (506 ) 
JPY     66,797,280        USD     600,000        Bank of America N.A.        11/19/18          (10,058 ) 
NOK     2,342,740        AUD     400,000        Citibank N.A.        11/19/18          (833 ) 
                       

 

 

  
                          (13,285 ) 
                       

 

 

  
    Net Unrealized Appreciation        $ 18,345  
                       

 

 

  

OTC Options Purchased

 

Description    Counterparty                              Expiration
Date		        Exercise
Price		        Notional
Amount (000)		        Value  

Call

 

AUD Currency

    Credit Suisse International             11/15/18        NZD        1.12        AUD        5,025        $ 3,625  

Put

 

USD Currency

    Bank of America N.A.             10/18/18        CAD        1.28        USD        2,395          6,546  

GBP Currency

    Natwest Markets PLC             10/25/18        CAD        1.64        GBP        2,815          6,872  
                                     

 

 

  
       13,418  
                                     

 

 

  
     $ 17,043  
                                     

 

 

  

OTC Interest Rate Swaptions Written

 

  

 

   Paid by the Fund    Received by the Fund      

 

    Expiration    Exercise     Notional        

 

  
Description   Rate     Frequency    Rate      Frequency    Counterparty    Date    Rate     Amount (000)      Value  

Call

 

10-Year Interest Rate Swap, 11/01/28

     3.13 %    Semi-annual     
 3-Month LIBOR,
2.40		  
 		    Quarterly    Morgan Stanley & Co. International PLC    10/30/18      3.13 %    USD      10,000      $ (52,913 ) 

2-Year Interest Rate Swap, 11/01/20

     3.04     Semi-annual     
 3-Month LIBOR,
2.40		  
 		    Quarterly    Morgan Stanley & Co. International PLC    10/30/18      3.04     USD      35,000        (34,576 ) 

30-Year Interest Rate Swap, 11/01/48

     3.14     Semi-annual     
 3-Month LIBOR,
2.40		  
 		    Quarterly    Morgan Stanley & Co. International PLC    10/30/18      3.14     USD      5,000        (60,765 ) 

5-Year Interest Rate Swap, 11/01/23

     3.10     Semi-annual     
 3-Month LIBOR,
2.40		  
 		    Quarterly    Morgan Stanley & Co. International PLC    10/30/18      3.10     USD      25,000        (76,307 ) 
                          

 

 

  
   $ (224,561 ) 
                          

 

 

  

 

 

     3  

Schedule of Investments  (unaudited) (continued)

September 30, 2018

   

BlackRock Enhanced Government Fund, Inc. (EGF)

 

OTC Options Written

 

Description    Counterparty                            Expiration
Date		        Exercise
Price		        Notional
Amount (000)		        Value  

Call

 

USD Currency

    Bank of America N.A.           10/18/18        CAD        1.35        USD        2,395        $ (101 ) 

Put

 

USD Currency

    Bank of America N.A.           10/18/18        CAD        1.26        USD        2,395          (1,111 ) 

GBP Currency

    Natwest Markets PLC           10/25/18        CAD        1.61        GBP        4,225          (2,852 ) 
                                   

 

 

  
       (3,963 ) 
                                   

 

 

  
     $ (4,064 ) 
                                   

 

 

  

Fair Value Hierarchy as of Period End

Various inputs are used in determining the fair value of investments and derivative financial instruments. These inputs to valuation techniques are categorized into a fair value hierarchy consisting of three broad levels for financial reporting purposes as follows:

 

  •  

Level 1 — Unadjusted price quotations in active markets/exchanges for identical assets or liabilities that the Fund has the ability to access

 

  •  

Level 2 — Other observable inputs (including, but not limited to, quoted prices for similar assets or liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market–corroborated inputs)

 

  •  

Level 3 — Unobservable inputs based on the best information available in the circumstances, to the extent observable inputs are not available (including the Fund’s own assumptions used in determining the fair value of investments)

The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3. The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the fair value hierarchy classification is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Investments classified within Level 3 have significant unobservable inputs used by the BlackRock Global Valuation Methodologies Committee (the “Global Valuation Committee”) in determining the price for Fair Valued Investments. Level 3 investments include equity or debt issued by privately held companies or Trusts. There may not be a secondary market, and/or there are a limited number of investors. Level 3 investments may also be adjusted to reflect illiquidity and/or non-transferability, with the amount of such discount estimated by the Global Valuation Committee in the absence of market information.

Changes in valuation techniques may result in transfers into or out of an assigned level within the hierarchy. In accordance with each Trust’s policy, transfers between different levels of the fair value hierarchy are deemed to have occurred as of the beginning of the reporting period. The categorization of a value determined for investments and derivative financial instruments is based on the pricing transparency of the investments and derivative financial instruments and is not necessarily an indication of the risks associated with investing in those securities. For information about the Trust’s policy regarding valuation of investments and derivative financial instruments, refer to the Trust’s most recent financial statements as contained in its semi-annual report.

 

 

4   

Schedule of Investments  (unaudited) (continued)

September 30, 2018

   

BlackRock Enhanced Government Fund, Inc. (EGF)

 

The following tables summarize the Fund’s investments and derivative financial instruments categorized in the disclosure hierarchy:

 

      Level 1        Level 2        Level 3        Total  

Assets:

 

Investments:

 

Long-Term Investments:

 

Asset-Backed Securities

    $ —        $ 1,509,773        $ —        $ 1,509,773  

Non-Agency Mortgage-Backed Securities

      —          132,613          —          132,613  

Preferred Securities

      —          1,974,580          —          1,974,580  

U.S. Government Sponsored Agency Securities

      —          42,870,088          —          42,870,088  

U.S. Treasury Obligations

      —          39,221,832          —          39,221,832  

Short-Term Securities

     1,027,675          —          —          1,027,675  

Options Purchased

                 

Foreign currency exchange contracts

      —          17,043          —          17,043  
  

 

 

       

 

 

       

 

 

       

 

 

  
   $ 1,027,675        $ 85,725,929        $ —        $ 86,753,604  
  

 

 

       

 

 

       

 

 

       

 

 

  

Derivative Financial Instruments(a)

 

Assets:

 

Foreign currency exchange contracts

    $ —        $ 31,630        $ —        $ 31,630  

Liabilities:

 

Foreign currency exchange contracts

      —          (17,349 )         —          (17,349 ) 

Interest rate contracts

     —          (224,561 )         —          (224,561 ) 
  

 

 

       

 

 

       

 

 

       

 

 

  
   $ —        $ (210,280 )       $             —        $ (210,280 ) 
  

 

 

       

 

 

       

 

 

       

 

 

  

 

  (a) 

Derivative financial instruments are forward foreign currency exchange contracts and options written. Forward foreign currency exchange contracts are valued at the unrealized appreciation (depreciation) on the instrument and options written are shown at value.

 

The Fund may hold assets and/or liabilities in which the fair value approximates the carrying amount or face value, including accrued interest, for financial reporting purposes. As of period end, reverse repurchase agreements of, $8,508,995 are categorized as Level 2 within the disclosure hierarchy.

During the period ended September 30, 2018, there were no transfers between levels.

 

 

     5  

Item 2 – Controls and Procedures

 

2(a) –

The registrant’s principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)) are effective as of a date within 90 days of the filing of this report based on the evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act and Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended.

 

2(b) –

There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the registrant’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.

Item 3 – Exhibits

Certifications – Attached hereto

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

BlackRock Enhanced Government Fund, Inc.

 

By:     /s/ John M. Perlowski                        
    John M. Perlowski
    Chief Executive Officer (principal executive officer) of
    BlackRock Enhanced Government Fund, Inc.

Date: November 19, 2018

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

By:     /s/ John M. Perlowski                        
    John M. Perlowski
    Chief Executive Officer (principal executive officer) of
    BlackRock Enhanced Government Fund, Inc.
Date: November 19, 2018
By:     /s/ Neal J. Andrews                          
    Neal J. Andrews
    Chief Financial Officer (principal financial officer) of
    BlackRock Enhanced Government Fund, Inc.

Date: November 19, 2018