Fears of a US debt fiasco has caused some large moves in shares of mREITs Friday morning, as panicked investors dump the shares. The bearish theory is that a U.S. debt downgrade or a prolonged debt impasse is going to hurt the underlying business of the mREITs, either through lower asset values or through making it harder for these firms to fund themselves in the short term. While the possibility of these events surely increases the risk both to the business of mREITS and the holders of the shares, the moves seen in the shares of large mREITs, specifically American Capital Agency Corp. (AGNC) and Annaly Capital Management (NLY), at the open of trade on Friday were absurd, and created an excellent opportunity for anyone who was watching. AGNC shares had already doubled their average daily volume by 10 am, as shares recovered from a plunge to $22.03 in the first few minutes of trading. Trading at $27.50 at 10:15 am, shares are up $5.50 off the days lows already, although still down about 3% from a close above $28 on Thursday. NLY was also seeing heavy trading, surpassing its average daily volume by 10 am and bouncing hard off the $14.05 low set shortly after the open. Trading at $16.78 at 10:15 am, shares are up $2.73 off the day's lows, though still down 2.8%.
Moves like these at the open came even as interest rates tied to U.S. government debt saw very little movement early on. The yield curve, defined by the difference between the yields of 2 and 10 year bonds, is still steep, at 2.48% right now. This spread measures the difference between short term and longer term interest rates, and is used as a measure of profitability for these companies. A steep yield curve makes the firms more profitable, and a flat curve makes them less so. Despite the volatility in the stock market, the bond market is remaining well behaved, and the steep yield curve continues to make the mREIT business very profitable.
As long as the yield curve remains steep, mREITs remain an attractive asset class. Every sharp drop in both AGNC and NLY in the last year have been opportunities to buy shares, and I think today is no different. Any more massive drops based on headlines will likely be met with buying, and will be an opportunity to either trade the names or add to positions. Either way, smart investors should be watching the bond market to gauge the health of this business, and taking advantage of panic driving prices of AGNC and NLY down, and their dividend yields ever higher.