On Monday, August 19th, the 10-year Treasury yield settled at 2.88%, which represented an increase of 5 bps from Friday's close, and a total increase of 11bps over the last two sessions. The rise in 10-year Treasuries has caused a number of sector-related ETFs as well as a number of mortgage REITs to experience a second day of value-diminishing sell-offs.
On the ETF side of things the iShares Mortgage Real Estate Capped ETF (NYSEARCA:REM) and the Market Vectors Mortgage REIT Income ETF (NYSEARCA:MORT) each fell 4.62% and 4.37%, respectively. On the individual mortgage REIT side of things shares of American Capital Agency (NASDAQ:AGNC) and Annaly Capital (NYSE:NLY) both fell 6.37% and 5.41%, respectively.
In the wake of the carnage, I not only wanted to take a closer look at the recent performance of both Annaly and American Capital but highlight what I think could be key re-entry points especially for those investors who may be interested in off-setting recent losses.
Performance and Trend Status - Annaly Capital
On Monday shares of NLY, which currently possess a market cap of $10.10 billion, a forward P/E ratio of 7.94, a gross margin of 76.10%, an operating margin of 68.90%, and a forward yield of 15.01% ($1.60) settled at a price of $10.66/share by the end of the day's session. From a cash and debt perspective, it should be noted that Annaly Capital has roughly $3.45 billion in cash and an estimated $85.73 billion of debt on its books.
Based on Monday's closing price of $10.66, shares of NLY are trading 9.42% below their 20-day simple moving average, 12.10% below their 50-day simple moving average, and 21.90% below their 200-day simple moving average. As I noted yesterday these numbers indicate a short-term, mid-term and long-term downtrend for the stock, which generally translates into a selling mode for most traders.
Performance and Trend Status - American Capital Agency
On Monday shares of AGNC, which currently possess a market cap of $8.10 billion, a forward P/E ratio of 5.91, a gross margin of 74.50%, an operating margin of 66.80%, and a forward yield of 20.56% ($4.20) settled at a price of $20.43/share by the end of the day's session. From a cash and debt perspective, it should be noted that American Capital Agency has roughly $14.23 billion in cash and an estimated $84.71 billion of debt on its books.
Based on Monday's closing price of $20.43, shares of AGNC are trading 8.76% below their 20-day simple moving average, 9.35% below their 50-day simple moving average, and 24.94% below their 200-day simple moving average. It's pretty clear these numbers indicate a short-term, mid-term and long-term downtrend for the stock, which generally translates into a selling mode for most traders.
Using the 10-Year Treasury Yield to Establish an Estimated Entry Point
When developing an investment strategy, I prefer to apply the old adage that says to "Buy Low and Sell High." In the simplest of terms, my basic strategy is to get the best return on my money and take advantage of higher-yielding dividends in the process. In the last few days, and especially in terms of the mortgage REIT sector, that strategy has been a heck of a lot harder to come by now that the 10-year Treasury yield has risen 27 bps since August 11.
So how can we, as high-yield income-driven investors, determine a fair enough price point to initially establish or re-establish a position in either Annaly Capital or American Capital Agency? There are a number steps we must follow in order to determine what I consider to be a fair and balanced entry point when it comes the these particular mortgage REITs.
First off we need to embrace the recent behavior of the 10-year Treasury yield and use today's closing yield of 2.88% as our starting point. Next we need to assume that the closing price of both Annaly Capital ($10.66) and American Capital ($20.43) are on an equal playing field with the 2.88% 10-year Treasuries are currently yielding. After that, we need to assume that a change in either direction will have at a similar if not equally proportionate change on the behavior both mortgage REITs. In other words today's 1.73% increase in the 10-year Treasury yield must directly relate to the 6.37% drop in shares of AGNC and the 5.41% drop in shares of NLY. Now that the mathematics are all worked out, we must now establish what I believe to be fairly sustainable entry points when and if the 10-year Treasury yield meets and/or exceeds 2.95% and 3.00%.
Estimated Entry Points
Although the calculations in the above mentioned equation would call for much lower entry points, I'd personally feel comfortable at the following estimated entry points. On one hand, and when it comes to Annaly Capital, the entry points I'd feel most comfortable at the 2.95% and 3.00% yield levels are about $10.30/share and $10.05/share. On the other hand, and when it comes to American Capital Agency, the entry points I'd feel most comfortable at the 2.95% and 3.00% yield levels are about $19.85/share and $18.90/share.
For those of you who may be considering a position in either Annaly Capital or American Capital Agency, I'd keep a watchful eye on both the behavior of the 10-year Treasury Yield and the Federal Reserve. Any move to ease up on QE3 spending and raise interest rate may contribute to a sell-off in the mortgage REIT sector.
Disclosure: I am long NLY, AGNC. 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.