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: 12/31/2016

Date of reporting period: 03/31/2016

Item 1 – Schedule of Investments

Schedule of Investments March 31, 2016 (Unaudited)

   

BlackRock Enhanced Government Fund, Inc. (EGF)

(Percentages shown are based on Net Assets)

 

Asset-Backed Securities   

Par  

(000)

     Value  

Securitized Asset Backed Receivables LLC Trust (a):

     

Series 2005-OP1, Class M2, 1.11%, 1/25/35

    $ 1,086      $ 982,640   

Series 2005-OP2, Class M1, 0.86%, 10/25/35

      1,025        919,147   
Total Asset-Backed Securities — 1.8%        1,901,787   
    
                  
Non-Agency Mortgage-Backed Securities  

Collateralized Mortgage Obligations — 1.0%

  

Bank of America Mortgage Securities, Inc., Series 2003-J, Class 2A1, 3.03%, 11/25/33 (a)

      119        118,264   

Bear Stearns Alt-A Trust, Series 2004-13, Class A1, 1.17%, 11/25/34 (a)

      164        159,655   

Homebanc Mortgage Trust, Series 2005-4, Class A1, 0.70%, 10/25/35 (a)

      925        844,256   
    

 

 

  
        1,122,175   

Interest Only Collateralized Mortgage Obligations — 0.1%

  

CitiMortgage Alternative Loan Trust, Series 2007-A5, Class 1A7, 6.00%, 5/25/37

      248        66,190   
Total Non-Agency Mortgage-Backed Securities — 1.1%        1,188,365   
    
                  
Preferred Securities  
Capital Trusts   

Diversified Financial Services — 0.5%

  

ZFS Finance (USA) Trust V, 6.50%, 5/09/67 (a)(b)

      504        495,180   

Electric Utilities — 1.4%

  

PPL Capital Funding, Inc., Series A, 6.70%, 3/30/67 (a)

      2,000        1,520,000   
        2,015,180   
Trust Preferred — 2.0%    Shares         

Capital Markets — 2.0%

  

Morgan Stanley Capital Trust VIII, 6.45%, 4/15/67

      80,000        2,021,567   
Total Preferred Securities — 3.9%        4,036,747   
U.S. Government Sponsored Agency Securities   

Par  

(000)

     Value  

Agency Obligations — 3.8%

  

Federal Farm Credit Bank, 4.55%, 6/08/20

    $ 3,500      $ 3,957,503   

Collateralized Mortgage Obligations — 6.3%

  

Fannie Mae Mortgage-Backed Securities, Series 2014-28, Class BD, 3.50%, 8/25/43

      1,556        1,669,789   

Ginnie Mae Mortgage-Backed Securities, Series 2006-3, Class C, 5.24%, 4/16/39 (a)

      4,779        4,846,336   
    

 

 

  
        6,516,125   

Interest Only Collateralized Mortgage Obligations — 1.8%

  

Fannie Mae Mortgage-Backed Securities:

     

Series 2012-96, Class DI, 4.00%, 2/25/27

      1,779        149,812   

Series 2012-M9, Class X1, 4.02%, 12/25/17 (a)

      3,603        156,504   

Series 2012-47, Class NI, 4.50%, 4/25/42

      1,667        259,976   

Ginnie Mae Mortgage-Backed Securities (a):

     

Series 2006-30, Class IO, 2.15%, 5/16/46

      407        28,498   

Series 2009-78, Class SD, 5.77%, 9/20/32

      1,675        332,795   

Series 2009-116, Class KS, 6.03%, 12/16/39

      562        93,223   

Series 2011-52, Class NS, 6.23%, 4/16/41

      4,498        881,379   
    

 

 

  
        1,902,187   

Mortgage-Backed Securities — 63.7%

  

Fannie Mae Mortgage-Backed Securities:

     

2.50%, 4/01/28

      6,441        6,642,649   

3.00%, 6/01/42 - 4/01/43

      7,455        7,663,567   

3.50%, 8/01/26 - 8/01/44

      13,924        14,703,173   

4.00%, 4/01/24 - 2/01/41

      12,318        13,172,963   

4.50%, 4/01/39 - 8/01/40

      8,436        9,257,553   

5.00%, 11/01/33 - 2/01/40

      4,686        5,227,423   

5.50%, 10/01/23 - 4/01/46 (c)

      7,114        8,015,286   

6.00%, 2/01/36 - 3/01/38

      734        837,672   

Freddie Mac Mortgage-Backed Securities, 4.50%, 5/01/34

      260        282,347   
 

 

                
   BLACKROCK ENHANCED GOVERNMENT FUND, INC.    MARCH 31, 2016    1

Schedule of Investments (continued)

   

BlackRock Enhanced Government Fund, Inc. (EGF)

 

U.S. Government Sponsored Agency Securities   

Par  

(000)

     Value  

Mortgage-Backed Securities (continued)

  

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

    $ 6      $ 6,386   
    

 

 

  
               65,809,019   

Total U.S. Government Sponsored Agency Securities — 75.6%

  

     78,184,834   
    
                  
U.S. Treasury Obligations  

U.S. Treasury Bonds, 4.38%, 5/15/41 (d)

      6,000        8,101,404   

U.S. Treasury Notes:

     

1.38%, 4/30/20 (d)

      17,000        17,175,984   

1.50%, 5/31/20

      1,300        1,319,551   

3.13%, 5/15/21

      6,500        7,097,948   

2.00%, 11/30/22 (d)

      4,500        4,636,584   

2.00%, 2/15/25 (d)

      6,000        6,128,202   

2.25%, 11/15/25

      2,800        2,914,078   

1.63%, 2/15/26

      2,800        2,759,313   
Total U.S. Treasury Obligations — 48.5%        50,133,064   

Total Long-Term Investments

(Cost — $130,638,994) — 130.9%

              135,444,797   
    
   
Short-Term Securities    Shares         

Money Market Funds — 4.0%

  

BlackRock Liquidity Funds, TempFund, Institutional Class, 0.37% (e)(f)

      4,097,691        4,097,691   

Total Short-Term Securities

(Cost — $4,097,691) — 4.0%

  

  

     4,097,691   

Options Purchased

(Cost — $73,305) — 0.1%

  

  

     52,127   

Total Investments Before TBA Sale Commitments and Options Written

(Cost — $134,809,990*) — 135.0%

   

  

     139,594,615   
TBA Sale Commitments  

Par  

(000)

     Value  

Fannie Mae Mortgage-Backed Securities (c) 5.50%,
4/01/46 - 5/01/46

   $ 6,960      $ (7,800,047 ) 

Total TBA Sale Commitments

(Proceeds — $7,790,272) — (7.5)%

  

  

     (7,800,047 ) 

Options Written

(Premiums Received — $441,093) — (0.6)%

  

  

     (601,343 ) 

Total Investments, Net of TBA Sale Commitments and Options Written

(Cost — $126,578,625) — 126.9%

   

  

     131,193,225   

Liabilities in Excess of Other Assets — (26.9)%

  

     (27,821,688 ) 
   

 

 

  

Net Assets — 100.0%

  

   $ 103,371,537   
   

 

 

  

 

*    As of March 31, 2016, gross unrealized appreciation and depreciation based on cost for federal income tax purposes were as follows:

 

   

Tax cost

  

   $ 134,809,990   
   

 

 

  

Gross unrealized appreciation

  

   $ 5,927,514   

Gross unrealized depreciation

  

     (1,142,889 ) 
   

 

 

  

Net unrealized appreciation

  

   $ 4,784,625   
   

 

 

  
 
Notes to Schedule of Investments

 

(a)   Variable rate security. Rate as of period end.

 

(b)   Security exempt from registration pursuant to Rule 144A under the Securities Act of 1933, as amended. These securities may be resold in transactions exempt from registration to qualified institutional investors.

 

                
2    BLACKROCK ENHANCED GOVERNMENT FUND, INC.    MARCH 31, 2016   

Schedule of Investments (continued)

   

BlackRock Enhanced Government Fund, Inc. (EGF)

 

(c)   Represents or includes a TBA transaction. As of period end, unsettled TBA transactions were as follows:

 

Counterparty   Value        Unrealized
Depreciation		  

Credit Suisse Securities (USA) LLC

   $ (2,534,347 )       $ (1,028 ) 

Barclays Bank PLC

   $ (1,789,384 )       $ (2,978 ) 

 

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

 

(e)   During the period ended March 31, 2016, investments in issuers considered to be affiliates 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 December 31,

2015

       

Net

Activity

       

Shares Held

at March 31,

2016

        Income  

BlackRock Liquidity Funds, TempFund, Institutional Class

        2,705,612           1,392,079           4,097,691         $ 2,615   

 

(f)   Current yield as of period end.

 

Portfolio Abbreviations

 

AUD    Australian Dollar              
IO    Interest Only              
LIBOR    London Interbank Offered Rate              
JPY    Japanese Yen              
NOK    Norwegian Krone              
NZD    New Zealand Dollar              
OTC    Over-the-Counter              
TBA    To-be-announced              
USD    U.S. Dollar              

Reverse Repurchase Agreements

 

Counterparty   Interest
Rate		     Trade
Date		     Maturity
Date1		     Face Value    

Face Value
Including

Accrued

Interest

    

Type of

Underlying

Collateral

    

Remaining

Contractual

Maturity of

the Agreements

  

Deutsche Bank Securities, Inc.

     0.46 %      6/19/15        Open      $ 3,925,000      $ 3,932,338        U.S. Treasury Obligations        Open/Demand   

Deutsche Bank Securities, Inc.

     0.26 %      8/25/15        Open        1,985,000        1,988,140        U.S. Treasury Obligations        Open/Demand   

Credit Suisse Securities (USA) LLC

     0.45 %      1/15/16        Open        2,035,000        2,036,933        U.S. Treasury Obligations        Open/Demand   

Credit Suisse Securities (USA) LLC

     0.47 %      3/15/16        Open        8,047,500        8,049,076        U.S. Treasury Obligations        Open/Demand   

Credit Suisse Securities (USA) LLC

     0.47 %      3/15/16        Open        6,022,500        6,023,679        U.S. Treasury Obligations        Open/Demand   

Credit Suisse Securities (USA) LLC

     0.47 %      3/15/16        Open        11,041,250        11,043,412        U.S. Treasury Obligations        Open/Demand   
Total      $ 33,056,250      $ 33,073,578       
       

 

 

      

 

  1   

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

 

                
   BLACKROCK ENHANCED GOVERNMENT FUND, INC.    MARCH 31, 2016    3

Schedule of Investments (continued)

   

BlackRock Enhanced Government Fund, Inc. (EGF)

 

Derivative Financial Instruments Outstanding as of Period End

OTC Options Purchased

 

Description  

Put/

Call

   Counterparty  

Expiration

Date

    

Strike

Price

    

Notional

Amount

(000)

     Contracts     Value  

NZD Currency

   Put   Deutsche Bank AG     04/28/2016      USD     0.65      NZD     1,565        —      $ 1,029   

USD Currency

   Put   UBS AG     04/28/2016      NOK     8.39      USD     1,035        —        20,914   

AUD Currency

   Put   HSBC Bank PLC     06/01/2016      USD     0.70      AUD     1,445        —        1,600   

AUD Currency

   Put   UBS AG     06/29/2016      NOK     6.24      AUD     2,020        —        28,584   

Total

  

   $ 52,127   
                 

 

 

  

OTC Interest Rate Swaptions Written

 

Description   Counterparty  

Put/

Call

   Exercise
Rate		    

Pay/

Receive
Exercise Rate

   Floating Rate
Index		   Expiration
Date		    

Notional

Amount (000)

     Market
Value		  

2-Year Interest Rate Swap

   Deutsche Bank AG   Call     0.91 %    Pay   3-Month LIBOR     4/28/16      USD     35,000      $ (57,208 ) 

5-Year Interest Rate Swap

   Deutsche Bank AG   Call     1.27 %    Pay   3-Month LIBOR     4/28/16      USD     30,000        (175,596 ) 

10-Year Interest Rate Swap

   Deutsche Bank AG   Call     1.72 %    Pay   3-Month LIBOR     4/28/16      USD     15,000        (160,128 ) 

30-Year Interest Rate Swap

   Deutsche Bank AG   Call     2.19 %    Pay   3-Month LIBOR     4/28/16      USD     5,000        (120,112 ) 

Total

                   $ (513,044 ) 
                 

 

 

  

OTC Options Written

 

Description   Put/
Call		   Counterparty   Expiration
Date		    

Strike

Price

     Notional
Amount
(000)		     Contracts     Value  

USD Currency

   Call   Barclays Bank PLC     04/27/2016      JPY     115.00      USD     1,035        —      $ (3,336 ) 

AUD Currency

   Call   HSBC Bank PLC     06/01/2016      USD     0.74      AUD     1,445        —        (44,633 ) 

AUD Currency

   Call   UBS AG     06/29/2016      NOK     6.60      AUD     2,020        —        (13,652 ) 

USD Currency

   Put   Barclays Bank PLC     04/27/2016      JPY     108.75      USD     1,035        —        (2,294 ) 

NZD Currency

   Put   Deutsche Bank AG     04/28/2016      USD     0.63      NZD     3,130        —        (441 ) 

USD Currency

   Put   UBS AG     04/28/2016      NOK     8.14      USD     2,070        —        (10,733 ) 

AUD Currency

   Put   UBS AG     06/29/2016      NOK     6.03      AUD     2,020        —        (13,210 ) 

Total

  

   $ (88,299 ) 
                 

 

 

  

 

                
4    BLACKROCK ENHANCED GOVERNMENT FUND, INC.    MARCH 31, 2016   

Schedule of Investments (continued)    BlackRock Enhanced Government Fund, Inc. (EGF)

 

 

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 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 Fund’s own assumptions used in determining the fair value of investments and derivative financial instruments)

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. The significant unobservable inputs used by the Global Valuation Committee in determining the price for Fair Valued Investments are typically categorized as level 3.

Changes in valuation techniques may result in transfers into or out of an assigned level within the hierarchy. In accordance with the Fund’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 Fund’s policy regarding valuation of investments, refer to the Fund’s most recent financial statements as contained in its annual report.

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:

                
Long-Term Investments:                 

Asset-Backed Securities

    —         $ 1,901,787         —      $ 1,901,787   

Non-Agency Mortgage-Backed Securities

    —           1,188,365         —        1,188,365   

Preferred Securities

  $ 2,021,567           2,015,180         —        4,036,747   

U.S. Government Sponsored Agency Securities

    —           78,184,834         —        78,184,834   

U.S. Treasury Obligations

    —           50,133,064         —        50,133,064   

Short-Term Securities

     4,097,691           —         —        4,097,691   

Options Purchased

    —           52,127         —        52,127   

Liabilities:

                

Investments:

                 

TBA Sale Commitments

    —           (7,800,047 )       —        (7,800,047 ) 
 

 

 

  

Total

   $ 6,119,258         $ 125,675,310         —      $ 131,794,568   
 

 

 

  
                
     Level 1        Level 2        Level 3      Total  
Derivative Financial Instruments1                 
Liabilities:                 

Foreign currency exchange contracts

     —         $ (88,299 )       —      $ (88,299 ) 

Interest rate contracts

     —           (513,044 )       —        (513,044 ) 
 

 

 

  

Total

     —         $ (601,343 )       —      $ (601,343 ) 
 

 

 

  

 

  1   

Derivative financial instruments are options written, which are shown at value.

 

                
   BLACKROCK ENHANCED GOVERNMENT FUND, INC.    MARCH 31, 2016    5

Schedule of Investments (concluded)    BlackRock Enhanced Government Fund, Inc. (EGF)

 

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, such assets and/or liabilities are categorized within the disclosure hierarchy as follows:

 

     Level 1      Level 2        Level 3      Total  

Liabilities:

                

Foreign currency overdraft

  —      $ (11,582 )       —      $ (11,582 ) 

Reverse repurchase agreements

  —        (33,073,578 )       —        (33,073,578 ) 
 

 

  

Total

  —      $ (33,085,160 )       —      $ (33,085,160 ) 
 

 

  

During the period ended March 31, 2016, there were no transfers between levels.

 

                
6    BLACKROCK ENHANCED GOVERNMENT FUND, INC.    MARCH 31, 2016   

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: May 23, 2016

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: May 23, 2016

 

By:       /s/ Neal J. Andrews                    
  Neal J. Andrews
  Chief Financial Officer (principal financial officer) of 
  BlackRock Enhanced Government Fund, Inc.

Date: May 23, 2016